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Docket: 2002-2110(IT)I |
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BETWEEN: |
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PERRY JONES, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Appeal heard on February 24, 2003 at Kelowna, British Columbia
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Before: The Honourable Mr. Justice L.M. Little |
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Appearances: |
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Agent for the Appellant: |
Murray G. Rossworn |
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Counsel for the Respondent: |
Jasmine Sidhu |
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AMENDED JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1999 taxation year is allowed, without costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
This Judgment is issued in substitution for the Judgment dated the 16th day of April 2003.
Signed at Vancouver, British Columbia, this 5th day of August 2003.
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"L.M. Little" |
Little, J.
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Citation: 2003TCC202 |
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Date: 20030805 |
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Docket: 2002-2110(IT)I |
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BETWEEN: |
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PERRY JONES, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
AMENDED REASONS FOR JUDGMENT
Little, J.
A. FACTS:
[1] The Appellant is a heavy equipment operator and a member of the Operating Engineers Union ("OEU").
[2] On the 31st day of December 1986 Bremith Contracting Ltd. (the "Company") was incorporated under the laws of the Province of British Columbia.
[3] All of the issued shares of the Company were registered in the name of Brenda Smith, the Appellant's wife. However, the Appellant testified that he was the beneficial owner of all of the issued shares of the Company. The Appellant said that the shares of the Company were registered in his wife's name rather than his name because of the policy of the OEU that union members could not also be Owner-Operators of construction equipment. The Appellant also said that the OEU policy regarding Owner-Operators that was in effect in 1980-90 no longer applies.
[4] The Company was in the construction business. The Company assisted in the development of subdivisions and carried out excavations for buildings and other structures. The main asset owned by the Company was a D3 Caterpillar bulldozer.
[5] The Appellant said that he advanced money to the Company to enable it to carry on its business.
[6] In 1999 the Appellant withdrew $37,500.00 from his Registered Retirement Savings Plan with the OEU. After paying income tax of $11,509.00 on this withdrawal the Appellant said that he advanced the sum of $25,000.00 to the Company.
[7] The Appellant said that his wife was responsible for the accounting and secretarial work for the Company and the preparation of income tax returns. The Appellant also said that in the year 2000 his wife sold assets (the bulldozer and other assets) owned by the Company and retained the funds in spite of a Court Order prohibiting his wife from disposing of Company owned assets.
[8] The Appellant said that the Company no longer carries on any business activity. The Appellant maintains that the Company continued to operate its business until 1999. The Appellant said that the Company became insolvent in 1999, the shares of the Company are worthless and the Company cannot repay the money that the Appellant advanced to the Company.
[9] When the Appellant filed his income tax return for the 1999 taxation year he did not claim an Allowable Business Investment Loss ("ABIL") with respect to the losses suffered by him in connection with the loans that he made to the Company.
[10] When the Minister of National Revenue (the "Minister") issued a Notice of Assessment for the Appellant's 1999 taxation year the Appellant filed a Notice of Objection. In the Notice of Objection the Appellant maintained that he was entitled to claim an ABIL of at least $25,000.00 in connection with the loans and other advances that he made to the Company.
B. ISSUE:
[11] Is the Appellant allowed to claim an ABIL of $25,000.00 or more in determining his income for the 1999 taxation year?
ANALYSIS:
[12] Paragraph 39(1)(c) of the Income Tax Act (the "Act") provides that a taxpayer may claim an Allowable Business Investment Loss if certain conditions are satisfied.
[13] One of the conditions that must be met is that the corporation must be a small business corporation both at the time that the loan was made and the time that the loan became worthless.
[14] In this situation the Company was engaged in an active business until at least 1996. However the Appellant testified that in the 1997, 1998 and 1999 years the Company leased the D3 bulldozer, on a "bare rental" basis to other contractors, i.e. the contractor would pay the Company so much per hour for the use of the bulldozer.
[15] Paragraph 39(1)(c) of the Act provides that a taxpayer may claim a business investment loss where the loss was incurred in respect of shares in a small business corporation or in respect of loans made to the corporation:
[16] The phrase "small business corporation" is defined in subsection 248(1) as follows:
"small business corporation" - "small business corporation", at any particular time, means, subject to subsection 110.6(15), a particular corporation that is a Canadian-controlled private corporation all or substantially all of the fair market value of the assets of which at that time is attributable to assets that are
(a) used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,
(b) shares of the capital stock or indebtedness of one or more small business corporations that are at that time connected with the particular corporation(within the meaning of subsection 186(4) on the assumption that the small business corporation is at that time a "payer corporation" within the meaning of that subsection), or
(c) assets described in paragraphs (a) and (b),
including, for the purpose of paragraph 39(1)(c), a corporation that was at any time in the 12 months preceding that time a small business corporation, and, for the purpose of this definition, the fair market value of a net income stabilization account shall be deemed to be nil;
[17] The phrase "active business" is defined in subsection 248(1) of the Act as follows:
"active business" in relation to any business carried on by a taxpayer resident in Canada, means any business carried on by the taxpayer other than a specified investment business or a personal services business;
[18] It will be noted that the definition of "active business" excludes a specified investment business.
[19] The phrase "specified investment business" is defined in subsection 125(7) of the Act as follows:
"specified investment business" carried on by a corporation in a taxation year means a business (other than a business carried on by a credit union or a business of leasing property other than real property) the principal purpose of which is to derive income (including interest, dividends, rents and royalties) from property but, except where the corporation was a prescribed labour-sponsored venture capital corporation at any time in the year,
does not include a business carried on by the corporation in the year where
(a) the corporation employs in the business throughout the year more than 5 full-time employees, or
(b) any other corporation associated with the corporation provides, in the course of carrying on an active business, managerial, administrative, financial, maintenance or other similar services to the corporation in the year and the corporation could reasonably be expected to require more than 5 full-time employees if those service had not been provided;
[20] The above definition provides that a specified investment business is one whose principal purpose is to derive income from property (including interest, dividends, rents or royalty). However, it will be noted that the definition of a specified investment business does not include a corporation whose business is "leasing property other than real property...". (Emphasis added)
[21] In this situation the Appellant testified that the principal and only business of the Company in 1997, 1998 and for part of 1999 was renting the bulldozer on a "bare rental" basis to other parties.
[22] In my opinion the Company was not a specified investment business in 1997, 1998 and 1999 and therefore the Company satisfies the test that it was a small business corporation in 1999.
[23] In order for a taxpayer to claim an ABIL the tax payer must be a shareholder of the Company.
COMMENT - In this situation, Brenda Smith was the registered shareholder of the Company. However, I am satisfied by the Appellant's testimony that the Appellant was the beneficial owner of the shares of the Company.
[24] In reaching the conclusion that the Appellant was the beneficial owner of the shares of the Company I have reviewed and I agree with the comments made by Mr. Justice Cattanach, 83 DTC 5193. At pages 5198-5199, Cattanach, J. referred to the creation of a trust and said:
...Equity looks to the intent rather than the form and if an intention to create a trust can be unmistakably inferred the court will give effect to that intention.
Despite the difficulty in giving an all embrasive definition of a trust the concept thereof is easy enough to grasp. The general idea of a trust is that one person in whom property is vested is compelled in equity to hold the property for the benefit of another.
[25] The taxpayer must also establish that the money was advanced to the Company in order to earn income.
COMMENT - In this situation the Appellant advanced $25,000.00 to the Company to enable the Company to make payments on its main asset - the bulldozer. If the Company was successful in the rental of the bulldozer the Appellant would receive a repayment, dividends on other amounts from the Company.
[26] As noted above the Appellant testified that he withdrew $37,500.00 from his RRSP and after paying income tax of $11,509.00 he advanced $25,000.00 to the Company.
[27] The evidence of Mrs. Tomlinson and the information contained in Exhibit A-6 confirm the advance of $25,000.00 that was made by the Appellant to the Company.
[28] The taxpayer must also establish that the Company which received the advance is insolvent or unable to repay the advance.
COMMENT - The Appellant testified that his wife sold the Company's main asset (a bulldozer) and that the Company was insolvent in 1999.
[29] I am satisfied that the Appellant has met the tests imposed by paragraph 39(1)(c) of the Act and that he should be allowed a Business Investment Loss of $25,000.00. Pursuant to paragraph 38(c) of the Act the Appellant is allowed to claim an Allowable Business Investment Loss equal to 75% of the $25,000.00 or $18,750.00 in determining his income for the 1999 taxation year.
[30] In reaching this conclusion I have referred to a number of decision of the Tax Court of Canada and the Federal Court of Appeal including the recent unreported decision of the Federal Court of Appeal in Larry W. Rich v. The Queen, [2003] F.C.J. No. 109. In the Rich case Mr. Justice Rothstein referred to the amount of the ABIL that was claimed and said at paragraph 33:
The appropriate standard of review is proof on a balance of probabilities, not one of bookkeeping perfection. In all the circumstances, I am satisfied that there is sufficient evidence that the indebtedness amounted to $125,000 at the end of 1995.
I agree with the comments of Mr. Justice Rothstein.
[31] The agent for the Appellant argued that the Appellant had advanced more than $25,000.00 to the Company. However, I am not satisfied on the evidence presented to the Court that the Appellant can claim an ABIL in excess of $25,000.00 in the 1999 taxation year.
[32] The appeal is allowed without costs.
Signed at Vancouver, British Columbia, this 5th day of August 2003.
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"L.M. Little" |
Little, J.
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CITATION: |
2003TCC202 |
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COURT FILE NO.: |
2002-2110(IT)I |
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STYLE OF CAUSE: |
Perry Jones and Her Majesty the Queen |
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PLACE OF HEARING: |
Kelowna, British Columbia |
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DATE OF HEARING: |
February 24, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Mr. Justice L.M. Little |
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DATE OF AMENDED JUDGMENT: |
August 5, 2003 |
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APPEARANCES: |
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Agent for the Appellant: |
Murray G. Rossworn |
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Counsel for the Respondent: |
Jasmine Sidhu |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |